When did option trading start?

In 1872, a renowned businessman in the United States, Russell Sage, was the first to formally create and introduce call and put options to operate in the U.S. UU. Russell Sage, a New York-born politician who became a financier, bought a seat on the New York Stock Exchange in 1874. There are many good options traders who don't know anything about the following historical facts. But we have included this section for those curious souls with the desire to learn as much as possible about whatever subject they choose to study.

Today, options are often successfully used as an instrument for speculation and for hedging risk. But the options market didn't always work as well as it does today. Let's begin our foray into the history of options with a look at the debacle commonly known as “Tulip Bulb Mania” of 17th century Holland. At the beginning of the 17th century, tulips were extremely popular as a status symbol among the Dutch aristocracy.

And as its popularity began to spread across Dutch borders into a global market, prices rose dramatically. To hedge the risk in the event of a bad harvest, tulip wholesalers began buying call options, and tulip producers began to protect profits with put options. At first, options trading in Holland seemed like a perfectly reasonable economic activity. But as the price of tulip bulbs continued to rise, the value of existing option contracts increased dramatically.

Thus, a secondary market for these options contracts emerged among the general public. In fact, it was not unheard of for families to use their entire fortune to speculate on the market for tulip bulbs. Unfortunately, when the Dutch economy fell into recession in 1638, the bubble burst and the price of tulips plummeted. Many of the speculators who had sold put options were unable or unwilling to meet their obligations.

To make matters worse, the options market in the 17th-century Netherlands was totally deregulated. So, despite the Dutch government's efforts to force speculators to honor their options contracts, you can't get blood out of a stone. Or a dry, wilted tulip bulb, for that matter. They also lost their petticoats, breeches, hats with buckles, mansions by the canal, windmills and countless herds of farm animals in the process.

And the options managed to acquire a bad reputation that would last almost three centuries. In 1791, the New York Stock Exchange opened its doors. And it wasn't long before a stock options market began to emerge among smart investors. However, in those days, there was no centralized market for options.

Options were traded “over-the-counter”, facilitated by brokers who tried to match option sellers with option buyers. Each strike price, maturity date and cost of each underlying share had to be traded individually. Finally, the formation of Put and Call Brokers and Dealers Association, Inc. But more problems arose due to the lack of standardized pricing in the options market.

The terms of each option contract had yet to be determined between the buyer and the seller. For example, in the year 1895, you may have seen an ad for Bob's Put Call Broker-Dealer in a financial newspaper. Then you can call Bob on your old phone and say, “I'm optimistic about Acme Buggy Whips, Inc. However, a big problem arose because there was no liquidity in the options market.

Once you had the option, you would have to wait to see what happened at maturity, ask Bob to buy the option back from you, or place a new ad in a financial journal to resell it. In addition, as in the 17th-century Netherlands, there was still a considerable risk that option contract vendors would not meet their obligations. If you managed to establish a profitable option position and the counterparty did not have the means to fulfill the terms of a contract you exercised, you were out of luck. There was still no easy way to force the counterparty to pay.

In 1968, the low volume of the commodity futures market forced CBOT to look for other ways to expand its business. It was decided to create an open stock options exchange, modeled after the futures trading method. Therefore, the Chicago Board Options Exchange (CBOE) was created as a derivative entity of the CBOT. Unlike the OTC options market, which had no set conditions for its contracts, this new exchange established rules to standardize contract size, strike price and expiration dates.

To further contribute to the viability of a listed option exchange, in 1973 Fischer Black and Myron Scholes published an article entitled “The Pricing of Options and Corporate Liabilities” in the Journal of Political Economy of the University of Chicago. The Black-Scholes formula was based on a thermodynamic physics equation and could be used to derive a theoretical price of financial instruments with a known maturity date. It was immediately adopted in the market as the standard for evaluating option price ratios, and its publication was of enormous importance to the evolution of today's options market. In fact, Black and Scholes later received a Nobel Prize in Economics for their contribution to pricing options (and I hope they drank a lot of aquavit to celebrate it during the trip to Sweden to pick up their prize).

Although today it is a large and prestigious organization, the CBOE had rather humble origins. Believe it or not, the original exchange was located in the former smoking room of the Chicago Board of Trade Building. Merchants used to smoke a lot in the old days, so at least it was a pretty big smoking lounge. Others doubted the ability of Chicago's “grain traders” to trade a financial instrument that was generally considered too complicated for the general public to understand.

Too bad The Options Playbook didn't exist back then, or the latter wouldn't have been a big concern. On opening day, the CBOE only allowed call options trading on 16 scarce underlying stocks. However, somewhat respectable 911 contracts changed hands and, at the end of the month, the average daily volume of the CBOE surpassed that of the OTC market. In June 1974, the average daily volume of the CBOE reached more than 20,000 contracts.

And the exponential growth of the options market during the first year proved to be a harbinger of what was to come. In 1975, the Philadelphia Stock Exchange and the United States Stock Exchange opened their own options trading floors, increasing competition and bringing options to a wider market. In 1977, the CBOE increased the number of shares in which options were traded to 43 and began to allow sell trading on a few shares in addition to purchases. Due to the explosive growth of the options market, in 1977 the SEC decided to conduct a comprehensive review of the structure and regulatory practices of all options exchanges.

They established a moratorium on listing options for additional stocks and discussed whether or not it was desirable or feasible to create a centralized options market. By 1980, the SEC had introduced new regulations regarding market surveillance on exchanges, consumer protection and compliance systems in brokerage firms. Eventually, they lifted the moratorium, and the CBOE responded by adding options on 25 more stocks. The next major event was in 1983, when index options started trading.

This development proved to be critical in helping drive the popularity of the options industry. The first index options were traded on the CBOE 100 index, which was later renamed S&P 100 (OEX). Four months later, options started trading on the S&P 500 index (SPX). Today, there are more than 50 different index options, and since 1983 more than 1 billion contracts have been traded.

In the mid-90s, web-based online trading began to become popular, making options instantly accessible to members of the general public. Gone are the days of bargaining over the terms of individual option contracts. This was a new era of instant option gratification, with quotes available on demand, covering options in a dizzying array of securities with a wide range of strike prices and expiration dates. The emergence of computerized trading systems and the Internet has created a much more viable and liquid options market than ever before.

Because of this, we have seen several new players enter the market. As of this writing, options exchanges listed in the United States include the Boston Stock Exchange, the Chicago Board Options Exchange, the International Stock Exchange, NASDAQ OMX PHLX, NASDAQ Stock Market, NYSE Amex and NYSE Arca. Therefore, today it is very easy for any investor to place an options trade (especially if you do it with Ally Invest). There is an average of more than 11 million options contracts that are traded every day with more than 3,000 securities, and the market continues to grow.

And thanks to the wide range of Internet resources (such as the site you're currently reading), the general public understands the options better than ever before. Securities products and services are offered through Ally Invest Securities LLC, member of FINRA and SIPC. View Security Disclosures Options involve risk and are not suitable for all investors. Review the Characteristics and Risks of Standardized Options brochure (PDF) before you start trading options.

Options investors can lose the full amount of their investment in a relatively short period of time. Foreign exchange, options and other leveraged products carry significant risk of loss and may not be suitable for all investors. Products that are traded on margin carry the risk of losing more than your initial deposit. The products offered by Ally Invest Advisors, Ally Invest Securities and Ally Invest Forex ARE NOT FDIC INSURED, NOT BANK GUARANTEED and MAY LOSE VALUE.

Zelle and Zelle related marks are the exclusive property of Early Warning Services, LLC and are used herein under license. Contracts similar to options have been used since ancient times. The first reputable option buyer was the ancient Greek mathematician and philosopher Thales of Miletus. On one occasion, the season's olive harvest was predicted to be higher than usual, and during the off-season, it acquired the right to use a series of olive presses the following spring.

When spring came and the olive harvest was higher than expected, he exercised his options and then rented the presses at a much higher price than he paid for his' option '. The seller of that option will no longer be at risk of being assigned to the opposite side of the transaction for that option. Bob would try to match you with a salesperson for the option contract, or if he thought it was favorable enough, he could take the other side of the business himself. Options may be bought and sold only for the purpose of making a profit or loss from those transactions, where buyers and sellers have no intention of exercising options or trading on the underlying instrument.

The most recent participants in the game are the International Stock Exchange (ISE), the Boston Options Exchange (BOX), NYSE Arca and the NASDAQ Options Market of NASDAQ OMX. A notable development in the history of options trading involved a US financier named Russell Sage. By 1974, the average daily volume of contracts exchanged at the CBOE exceeded 20,000 and in 1975 two more floors of options trading were opened in the United States. For example, a trader could sell an option to open a position on one exchange and then buy the same type of option on the other exchange in order to benefit from price discrepancies between the two exchanges.

For the first time, options contracts were properly standardized and there was a fair market for them to be traded. When an option is exercised, the cost to the option holder is the strike price of the purchased asset plus the premium, if any, paid to the issuer. In the following years, more options exchanges were established around the world and the range of tradable contracts continued to grow. Options trading was certainly on the rise at this point, although the lack of regulation meant investors remained cautious.

In the same year, the SEC also imposed a moratorium on additional lists of options to assess the growth and risk of the options industry. The massive fall of Nikkei after the earthquake caused a hemorrhage in Leeson's trading losses of options. In 1975, the Securities and Exchange Commission approved the Options Clearing Corporation (OCC), which remains the clearing agent for all U.S. based options exchanges.

There was no formal stock market yet, but Sage created an activity that was a significant step forward for options trading. . .